Tuition Is Expensive At The School Of Hard Knocks

by Doug Quance

Associate Broker

Author website

Another Episode Of “It Doesn’t Pay To Be A Cheap Bastard”

In times like these, real estate investors often search for the corners to be cut. While many of the corners should be cut – others should not.

Such is the case of adequate insurance.

Many sellers are having to resort to leasing out their properties. Some of these properties are leased out under a lease-purchase agreement… while others are simply rented out. Their goal is to simply stop the red ink.

When I list a vacant property for sale, one of my areas of discussion with the seller is adequate insurance coverage. And let me tell you – it ain’t cheap. Vacant homes are not only more susceptible to vandalism, but when something like a pipe breaks or some bad wiring starts a fire – the damage is usually far greater than a home which is occupied.

This increase in premium can triple your insurance costs… or more.

But a vacant property is not the only concern. If you rent or lease your property, you would be well-advised to report this to your insurance company so that they can ensure your policy will maintain its coverage under that particular scenario.

Case in point is a recent tale of woe told to me by a lender who was about to fund a new investment property for one of her clients. This client had a property in Florida that he had lease-purchased to a tenant who had been paying their rent in a timely manner. But shortly before closing on his new property – the neighbors of his lease-purchase tenants called him up to inform him that the tenants left in the middle of the night.

At first blush, this only seemed to be a big nuisance to her client, as the tenants had posted a $10K non-refundable deposit… so he went down to Florida to check it out.

And this is where the other shoe drops.

The tenants had torn the place up. With a vengeance. Stole all the fixtures… even the cabinets in the kitchen. The damage was so extensive – it made that $10K deposit pale in comparison.

My first thought was that of how the insurance company was going to handle the claim – since there was no break-in. I expected the insurance company to look for a loophole… but alas, it was much more simple than that.

The seller never adjusted his policy to a non-owner-occupied status.

And therefore, the seller had no claim.

So, instead of acquiring his next property… he was busy investing his money – for the second time – into this property. Sure, he had a nice non-refundable deposit to fall back on… but that was only a small part of the expense of flying down to Florida to restore his property into salable condition.

So let this be a warning to all of you sellers who have moved into your new homes and are thinking of becoming landlords because the real estate market is so slow. The insurance company will like nothing better than to have you create the conditions of which they will not be paying a claim… especially when you are sending them good money on a regular basis.

There’s nothing an insurance company would like better.

Remember – if you think insurance is expensive… try ignorance.